Econ 202 Test Review (Quizzes 9-12)
If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35, what is the firm's average fixed cost at that level of output?
$15
When a firm hires 10 units of labor, 20 pens are produced. When it hires another unit of labor, the total output increases to 23 pens. If the price of one pen is $2, the value of the marginal product of the eleventh unit of labor is ________.
$6
The Pet Emporium hires workers to bathe cats. The Emporium sells this service for $20. The marginal revenue product of this store's fifth worker is $100. The marginal product of the fifth worker is
5 bathed cats.
Which of the following is an example of adverse selection?
A customer buying a defective appliance from a used goods market
Which of the following is a problem that arises in a health insurance market?
A disproportionate number of high-risk individuals are attracted to buy insurance.
Which one of the following is an example of asymmetric information?
A homeowner knowingly sells a house that has hidden electrical problems. A company hires an employee who has an addiction to sleeping pills. A supermarket repackages packages of stale meat and sells them.
Which one of the following about a monopoly is false?
A monopoly must have some kind of government privilege or government imposed barrier to maintain its monopoly.
Which of the following is likely to cause a decrease in the wage rate and an increase in the employment level of a country?
A right shift in the supply curve for labor, without any change in the demand curve for labor
Suppose a perfectly competitive firm, which is initially in long-run equilibrium experiences a decrease in the wages it must pay its employees. In the short run, which of the following will occur?
ATC and MC will shift down, causing the firm to earn a positive economic profit.
Scenario: The market for used cell phones is very popular in Barylia. However, several phones available in this market are of inferior quality and it is often impossible to differentiate between a good-quality phone and a poor-quality phone. Refer to the scenario above. Which of the following problems is likely to arise in the market for used cell phones in Barylia?
Adverse selection
Which of the following is true of a simultaneous move game?
All relevant benefits and costs of each action are taken into account.
In recent years, Amazon has lowered its profits by offering some of its customers free shipping on books and building more warehouses to hold its book inventories. Which of the following explains Amazons actions?
Amazon took these actions to compete more effectively with existing online booksellers.
Scenario: Elly owns a small coffee shop. She has only one employee. One weekend, she decides to take a break from work. She is wondering whether she should trust her employee to run the shop in her absence. If she does not trust him, she would have to keep the shop closed, in which case neither she nor her employee will be able to make money. In contrast, if she trusts him, he can either cooperate and run the shop or he can defect and steal from the shop. If he cooperates, both of them will earn money. If he steals from the shop, he will make more money while she will lose. Refer to the scenario above. Which of the following is likely to happen if Elly is known to be vengeful?
Both Elly and her employee will earn money.
Which of the following is an example of signaling in a market with asymmetric information?
Certification of used cars by third parties
In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider. Why might such a system lead to an inefficient outcome?
Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
Assume the firms in a monopolistically competitive industry initially are earning positive economic profits. Which of the following will not occur over time?
Demand for the existing firms' output will become more inelastic.
A perfectly competitive industry achieves allocative efficiency in the long run. What does allocative efficiency mean?
Each firm produces up to the point where the price of the good equals the marginal cost of producing the last unit.
What is the dominant strategy in the prisoner's dilemma?
Each prisoner confesses because this is the rational action to pursue.
Which of the following statements is correct?
Economic profit takes into account all costs involved in producing a product.
Which of the following correctly identifies a difference between taste-based discrimination and statistical discrimination?
Employers engaging in taste-based discrimination are willing to forego profits, whereas employers engaging in statistical discrimination are trying to enhance profits.
If marginal cost is above the average variable cost, then average variable cost is decreasing.
False
If the demand for labor is unchanged, population growth will increase the supply of labor and increase the equilibrium wage.
False
Technological advancements that increase labor's productivity shift the labor supply curve to the right.
False
In long-run perfectly competitive equilibrium, which of the following is false?
Firms earn economic profit.
Rob Neyer is a baseball writer for sbnation.com. He has described attending a Red Sox game at Fenway Park in Boston and having a great seat in the sun on a hot, humid day: "Granted, I could have moved under the overhang and enjoyed today's contest from a nice, cool, shady seat. But when you paid forty-five dollars for a ticket in the fourth row, it's tough to move back to the twenty-fourth [row]." Source: Rob Neyer, Feeding the Green Monster, New York: iPublish.com, 2001, p.50. What should Rob do?
He should weigh the marginal cost of moving into the shade (a less desirable view) versus the marginal benefit of being under the shade.
________ discourage low-risk individuals from seeking health insurance.
High premiums
You have been hired by the No Hassle Collection Agency to provide economic advice. The owner of the agency tells you that No Hassle's only variable input is the number of collection agents. The hourly wage for collection agents is $30.00. The marginal revenue product curve for collection agents reaches its maximum at five workers with a marginal revenue product of $34.00. What advice would you give this firm?
Hire collection agents until the marginal revenue product is equal to the wage — which will occur when more than five agents are employed.
Which of the following is a characteristic of a monopolistically competitive market? I. Each firm is a price-taker. II. Firms sell slightly differentiated products. III. Each firm faces a downward-sloping demand curve.
II and III only
What is the difference between perfect competition and monopolistic competition?
In perfect competition, firms produce identical goods, while in monopolistic competition, firms produce slightly different goods.
A soybean farmer sells soybeans in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of soybeans is $6 a bushel, the wage rate is $30, the farmer employs eight workers and the marginal product of the eighth worker is 7 bushels. What would you advise this farmer to do?
Increase employment because the wage paid is less than the marginal revenue product.
A wheat farmer sells wheat in a perfectly competitive market and hires labor in a perfectly competitive market. The market price of wheat is $2 a bushel, the wage rate is $10, the farmer employs five workers and the marginal product of the fifth worker is 10 bushels. What would you advise this farmer to do?
Increase employment because the wage paid is less than the marginal revenue product.
Which of the following helps in reducing the problem of adverse selection in health insurance markets?
Insurance mandates
Which of the following is true of an extensive-form game?
It involves sequential decision making by the players.
What role does a company like J.D. Power (which provides product satisfaction reviews) serve?
It provides a signal of quality.
What is allocative efficiency?
It refers to a situation in which resources are allocated such that the last unit of output produced provides a marginal benefit to consumers equal to the marginal cost of producing it.
Sarah is a high school graduate and James is a college graduate. Which of the following statements is true?
James is likely to have more human capital than Sara.
Which of the following statements is true?
Lower wages are normally offered for jobs with better amenities.
A firm could continue to operate for years without ever earning a profit as long as it is producing an output where
MR > AVC.
Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit-maximizing outputs?
Marginal revenue is less than price
For a perfectly competitive firm, which of the following is not true at profit maximization?
Market price is greater than marginal cost.
Which of the following is true of a Nash equilibrium?
No player can improve his payoff by changing his strategy once in Nash equilibrium.
Peet's Coffee and Teas produces some flavorful varieties of Peet's brand coffee. Is Peet's a monopoly?
No, although Peet's coffee is a unique product, there are many different brands of coffee that are very close substitutes.
Suppose that a firm in a competitive market succeeds in producing a superior product and selling it at a price that generates a large demand. As a result, the firm's market share is almost 100 percent. Meanwhile, other firms are trying to regain their market shares through research and development. Is this firm a monopolist?
No, because it faces potential competition from other companies.
The average price of gasoline in your neighborhood is $2.15 per gallon. Your neighbor, Diana tells you that you can "save a lot" by frequenting a gas station 20 miles outside your neighborhood where the price of gasoline is $2.06 per gallon However, she cautions you that there are usually long lines at that station. Is her suggestion beneficial to you?
No, if one factors in the non-monetary opportunity costs (driving time and waiting in line), it could prove more costly to go to the lower-priced gasoline station.
Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?
Restaurants do not sell identical products.
Which of the following is a market-based solution to the problem of adverse selection?
Signaling
Anchoring is more closely associated with which of the following factors?
Suggestions that affect your final decision
What is one of the most important benefits of the Internet?
The Internet has reduced asymmetric information.
Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
Which of the following is likely to be used as a signal in the job market?
The degree obtained by the applicant
Suppose the market for tortillas is initially in equilibrium, but then the equilibrium wage rate and the equilibrium quantity of labor both increased. What happened in the market for tortilla?
The demand for tortillas increased.
What is always true at the quantity where a firm's average total cost equals average revenue?
The firm breaks even.
Assume that the 4K and OLED television sets industry is perfectly competitive. Suppose a producer develops a successful innovation that enables it to lower its cost of production. What happens in the short run and in the long run?
The firm will be able to increase its economic profits temporarily, but in the long run its economic profits will be eliminated as other firms copy the innovation.
Which of the following will happen if a firm in a duopoly with homogeneous products increases its price above its marginal cost once a Nash equilibrium is reached?
The firm will lose all its customers to its rival.
What does it mean to say that a game is in "extensive form"?
The game is presented as a decision tree
Which of the following is an example of a barrier to entry?
The government grants licenses to taxicab drivers, without which it is illegal to operate a taxicab.
Prisoner's dilemma games imply that cooperative behavior between two people or two firms always breaks down. But reality teaches us that people and firms often cooperate successfully to achieve their goals. Why do the results from prisoner's dilemma games fail to predict real-world results?
The prisoner's dilemma does not apply to most business situations that are repeated over and over.
If the supply of labor increases, which of the following events will occur?
The wage rate will fall and firms will increase employment up until the point where MRP equals the new wage rate.
Which of the following statements regarding the relationship between average and marginal costs is INCORRECT?
There is no way for average variable costs to fall when marginal costs are falling.
An increase in the supply of capital, which is a substitute to labor, will lead to a decrease in the demand for labor.
True
Higher wages that compensate workers for unpleasant aspects of a job are called compensating differentials.
True
Increases in population shift the market supply curve for labor to the right.
True
One possible reason as to why consumers respond to sales is that by displaying a "high" regular price and a "low" sale price, sales provide consumers with a reference point to interpret the prices being offered.
True
One reason college students do not study enough to get high grades is that they are unrealistic about their future behavior.
True
When firms exit a perfectly competitive industry, the market supply curve shifts to the left.
True
The total value to society of having garbage removed is greater than the value of baseball games. Why, then, are baseball players paid more than garbage collectors?
Wages do not depend on total values but marginal values. The marginal revenue product of baseball players exceeds the marginal revenue product of garbage collectors.
Which of the following is an example of a long-run adjustment?
Walmart builds another Supercenter.
A perfectly competitive firm produces 3,000 units of a good at a total cost of $36,000. The fixed cost of production is $20,000. The price of each good is $10. Should the firm continue to produce in the short run?
Yes, it should continue to produce because the firm's revenues cover the total variable cost of $16,000.
Scenario: Your car broke down while you were driving to the office one morning. You took it to the nearest service center and were told by the mechanic that you need to pay $500 for the repair. You are confused whether or not to trust him. If you do not trust him, you have to take it to another service center, which is far away and inconvenient. If you trust him, he can either cooperate or defect (do an honest job or not). If he does an honest job, both of you will gain from the trade. If he does not do an honest job, he will gain $500 while you will lose your money. Clearly, he will gain more by defecting rather than cooperating with you. Refer to the scenario above. Which of the following is likely to happen if the service center has a reputation of trustworthiness?
You will trust the mechanic and he will cooperate.
In the prisoners' dilemma game, when each player takes the best possible action given the action of the other player
a Nash equilibrium is reached.
One result of asymmetric information about people's ability to repay a loan is that:
a bank could make many loans to people who don't pay them back.
A sequential game can be used to analyze whether a retail firm should build a large store or a small store in a city, when the correct choice depends on whether a competing firm will build a new store in the same city. Which of the following is used to analyze this type of decision?
a decision tree
The relationship between a pure-strategy Nash equilibrium and a dominant-strategy equilibrium is that:
a dominant-strategy equilibrium is a special case of a pure-strategy Nash equilibrium.
Being a price taker essentially means
a firm cannot influence the market price.
A price maker is
a firm that has some control over the price of the product it sells.
Relative to a perfectly competitive market, a monopoly results in
a gain in producer surplus less than the loss in consumer surplus.
A firm can use anchoring to influence consumer choices so as to increase sales by marking
a high "regular price" on a product, which makes the discounted "sale price" appear to be a bargain.
Information asymmetry in a market can lead to ________.
a market failure
Which of the following would be categorized as an opportunity cost? a. not being able to spend your $10,000 savings if you sink the money in your business b. the cost of purchasing supplies for your house-cleaning business c. the cost of purchasing auto insurance for your dry-cleaning delivery business
a only
In comparing accounting profit with economic profit, we generally find that
accounting profit is greater than economic profit.
Marginal cost is the
additional cost of producing an additional unit of output.
An insurance company is likely to attract customers like Clancy who want to purchase insurance because he knows better than the company that he is more likely to make a claim on a policy. What is the term used to describe the situation above?
adverse selection
Consider a used car market in which half the cars are good and half are bad (lemons). Suppose the average price of a good car is $9,000 and the average price of a lemon is $3,000. If rational buyers are willing to pay $6,000 for a used car, then sellers will agree to sell mostly lemons at this price. What is the term used to describe this situation?
adverse selection
Life insurance companies often give applicants a physical examination to prevent
adverse selection
________ occurs when one agent in a transaction knows about a hidden characteristic of a good.
adverse selection
Which of the following is an example of a way in which an oligopolistic firm can escape the prisoner's dilemma?
advertising that it will match its rival's price
A dominant strategy is one that
always yields the highest benefit regardless of what the other players do.
An increase in technology that enhances labor productivity will likely result in:
an increase in labor employment and an increase in the wage rate.
An increase in the demand for orthodontic services leads to
an increase in the demand for orthodontists.
Which of the following will lead to an outward shift in the firm's short-run demand for labor?
an increase in the price of output
To maintain a monopoly, a firm must have
an insurmountable barrier to entry.
At low wages, the labor supply curve for most people slopes upward because
as wages increase the opportunity cost of leisure increases.
If in the market for used bikes only sellers can distinguish between good quality and bad quality used bikes, then in that market there exists:
asymmetric information
The term that is used to refer to a situation in which one party to an economic transaction has less information than the other party is
asymmetric information
Suppose you and your roommate are trying to decide how to divide up the remaining slice of pizza left over from the night before. Your roommate has the following proposal. You get to divide the remaining slice of pizza, but he gets to choose which of the two pieces of pizza to consume. As a result, you decide to cut the remaining slice of pizza into equal portions. This is an example of ________.
backward induction
The first mover in an extensive-form game should use ________ to win the game.
backward induction
Microsoft hires marketing and sales specialists to decide what prices it should set for its products, whereas a wealthy corn farmer in Iowa, who sells his output in the world commodity market, does not. Why is this so?
because Microsoft could potentially lose sales if it sets prices indiscriminately
Why does a monopoly cause a deadweight loss?
because it stops producing output at a point where price is above marginal cost
As more output is produced, the marginal product of labor declines
because of the law of diminishing returns.
Which of the following explains why talented major league baseball players command much higher salaries than neurosurgeons?
because the supply of talented major league baseball players is low relative to its demand compared to the supply of neurosurgeons. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon.
A duopolists' dilemma occurs when two firms in a market would be better off if
both choose the high price but instead each chooses the low price.
Adverse selection arises in the health insurance market because ________.
buyers have private information
The marginal product of labor is the:
change in output resulting from adding an additional unit of labor.
Marginal cost is equal to
change in total cost divided by change in output. change in total variable cost divided by change in output
A truck driver getting paid more than a school teacher is due to ________.
compensating wage differentials
As word processing on personal computers expanded, sales of typewriters began to disappear. Which competitive force does this event demonstrate?
competition from substitute goods or services
The value of the marginal product of labor is the ________.
contribution of an additional unit of labor to a firm's revenue
A game in which each player adopts its dominant strategy
could result in a Nash equilibrium.
Customer discrimination occurs when
customers refuse to buy products produced by a racially diverse workforce.
Decision trees are commonly used to illustrate how firms make business decisions that depend on the actions of rival firms. A decision tree has boxes that contain points that represent when firms must make the decisions contained in the boxes. What are these points called?
decision nodes
Suppose that a perfectly competitive firm's marginal revenue equals $12 when it sells 10 units of output. If the marginal cost of producing the 10th unit is $14, to maximize its profit the firm should
decrease its production.
Buyers in the market for used guitars are getting more pessimistic about the possibility of getting a good guitar. This will cause the price of used guitars to ________ and the percentage of good used guitars to ________.
decrease; decrease
If the price of output increases, the labor ________ curve shifts to the ________.
demand; right
In game theory, the strategy that always yields the highest benefit for the player using it is the
dominant strategy.
The demand curve for a perfectly competitive *industry* is
downward sloping
Both buyers and sellers are price takers in a perfectly competitive market because
each buyer and seller is too small relative to others to independently affect the market price.
The word "monopolistic" in the label "monopolistic competition" refers to the fact that:
each firm produces a slightly different version of the product.
A Nash equilibrium occurs if ________.
each player chooses strategies that are mutual best responses
If two duopolists can collude successfully, then both will
earn greater profits than if they did not collude.
In a perfectly competitive market, a(n) ________ occurs because ________.
efficient outcome; total surplus is maximized
Assume health insurance is provided universally by the government. This would
eliminate the problems of adverse selection
If fixed costs do not change, then marginal cost
equals the change in variable cost divided by the change in output.
Because of the income effect, the labor supply curve is
eventually backward bending as wage rate increases.
The rules of accounting generally require that ________ costs be used for purposes of keeping a company's financial records and for paying taxes. These costs are sometimes called ________ costs.
explicit; accounting
When economists say a market has "barriers to entry," they refer to:
factors that prevent other firms from challenging a firm with market power.
You cause a fire insurance company to face a moral hazard problem when you take ________ you buy fire insurance from the company.
fewer precautions to prevent fires after
The perfectly competitive market structure benefits consumers because
firms are forced by competitive pressure to be as efficient as possible.
When considering perfect competition the absence of entry barriers implies that
firms can enter and leave the industry without serious impediments.
The word "competition" in the label "monopolistic competition" refers to the fact that:
firms vie against each other to get customers to buy their version of the product.
Assume health insurance is provided universally by the government. This would
force every taxpayer to bear the costs of moral hazard.
Most economists believe that a small amount of the gap between the wages of white males and the wages of other groups is due to discrimination. Which of the following factors is not another factor that explains part of this gap?
geographic location
A perfectly competitive industry achieves allocative efficiency when
goods and services are produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.
A perfectly competitive firm will maximize profits (or minimize losses) so long as price (marginal revenue) is:
greater than average variable cost.
A profit-maximizing monopoly's price is
greater than the price that would prevail if the industry was perfectly competitive.
Adverse selection occurs in the market for used cars because used car buyers
have less information than used car sellers
Compensating differentials are associated most closely with which of the following?
hazardous jobs
In an extensive-form game, payoff to a player is usually higher if ________.
he is the first mover
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund. Refer to the scenario above. If Joseph prefers fairness to money, ________.
he will accept the offer if offered an equal share of the money
Scenario: Phillip and Joseph are two classmates who represented their college in a quiz competition as a team and won $500. However, the winning amount was handed over by the organizers to their professor who had accompanied them. The professor gave the money to Phillip and asked him to offer any amount he wants to Joseph. If Joseph accepts the offer, the money would be split in the decided proportion between them. However, if Joseph rejects the offer, the money would go to their college fund.Refer to the scenario above. If Joseph prefers money to fairness, ________.
he will always accept any offer made to him
If the price of labor increases, the typical perfectly competitive firm in the short run will
hire less labor.
Shama is producing candles in a perfectly competitive market. When she produces 500 candles, her total cost is $250. If she produces one additional candle, her total cost increases to $260. In order to maximize her profit, she should produce the additional candle
if the market price for a candle is $12.
A reason why a perfectly competitive firm's demand for labor curve slopes downward is that
in the short run, as more labor is hired, labor's marginal product falls because of the law of diminishing returns.
If the demand for hamburgers increases, it is likely that the demand for fast-food employees will
increase
If, for a perfectly competitive firm, price exceeds the marginal cost of production, the firm should
increase its output.
Suppose a perfectly competitive firm faces the following cost and revenue conditions: ATC = $25.50; AVC = $20.50; MC = $25.50; MR = $28.50. The firm should
increase output.
CARFAX is a company that compiles and sells histories of used cars. CARFAX reduces the:
information asymmetry in the used car market.
If a perfectly competitive firm's price is less than its average total cost but greater than its average variable cost, the firm
is incurring a loss.
Compared to perfect competition, the consumer surplus in a monopoly
is lower because price is higher and output is lower.
A seller's verbal assurance that a used car is a plum (high-quality car):
is not effective at reducing the problems associated with asymmetric information.
Diet Coke ________ considered a product in a monopoly market, because ________.
is not; it has many substitutes
The Aluminum Company of America (Alcoa) had a monopoly until the 1940s because
it had control of almost all the available supply of bauxite.
A strategy is dominant if
it yields a payoff at least as large as that from any other strategy, regardless of the actions of other players.
If a firm shuts down in the short run,
its loss equals its fixed cost.
The wage rate is the opportunity cost of
leisure
For the past year, Teddy has had a part-time job at which he is willing to work 30 hours each week. During Teddy's annual review, his boss grants him an 8 percent increase in his wage. As a result of the wage increase, Teddy is now willing to work 25 hours each week. Teddy's opportunity cost of ________ has risen and because for Teddy the substitution effect of the wage hike is ________ than the income effect.
leisure; less
One consequence of imperfect information in the health insurance market is that:
less healthy individuals are more likely to buy insurance, driving up the cost of insurance for everyone.
Suppose a family-owned donut shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the donut shop are
less than $24,000.
The rutabaga market is perfectly competitive. Research is published claiming that eating rutabagas leads to gaining weight and so the demand for rutabagas permanently decreases. The permanent decrease in demand results in a
lower price, economic losses by rutabaga farmers, and exit from the market.
Undesirable job features lead to a ________ labor ________.
lower; supply
If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that
marginal costs are $100.
Marginal revenue product is
marginal physical product multiplied by marginal revenue.
The decision rule for a profit-maximizing firm operating in a competitive market to hire an additional worker is the value of the:
marginal product of the worker should be equal to or greater than the wage rate
If a theatre company expects $250,000 in ticket revenue from five performances and $288,000 in ticket revenue if it adds a sixth performance, the
marginal revenue of the sixth performance is $38,000.
A firm's demand for labor curve is also called its
marginal revenue product of labor curve.
The price of a seller's product in perfect competition is determined by
market demand and market supply
A firm's basic goal is best described as
maximizing profit.
If both the demand for labor and the supply of labor increase, then the equilibrium wage rate ________ and the equilibrium quantity of labor ________.
might rise, fall, or not change; increases
Joseph starts driving with much less care after buying car insurance. His behavior is an example of ________.
moral hazard
More people started building houses in earthquake-prone regions when the government of Polonia launched an insurance program for houses in this region. This is an example of ________.
moral hazard
As the wage rate falls, other things constant, perfectly competitive firms will employ
more workers.
If, in a perfectly competitive industry, the market price facing a firm is above its average total cost at the output where marginal revenue equals marginal cost, then
new firms are attracted to the industry.
If a typical firm in a perfectly competitive industry is earning profits, then
new firms will enter in the long run causing market supply to increase, market price to fall, and profits to decrease.
One interesting feature of a prisoner's dilemma game is that
non-cooperative behavior leads to lower payoffs than cooperative behavior.
Alejandro is a computer programmer employed by XYZ Tech Corp. He is Hispanic. He gets an offer from another company that is trying to lure him away from XYZ and is willing to pay him a higher salary than XYZ pays him. Alejandro asks his boss whether the company is willing to match the offer to keep him at XYZ. His boss says, "Don't let the door hit you on your way out." Why did the boss fail to match the other firm's offer?
not clear why XYZ did not match the other firm's offer
When a perfectly competitive firm finds that its market price is below its minimum average variable cost, it will sell
nothing at all; the firm shuts down.
Consider a used car market in which half the cars are good and half are bad (lemons). A rational buyer in this market should
offer to pay a price somewhere between the price she would pay for a good car and the price she would pay for a lemon.
A natural monopoly exists when
one firm can supply an entire market at a lower average total cost than can two or more firms.
A best response is ________.
one player's optimal action choice taking the other player's action as given
Alice, Bud, and Celia can produce rubber bands in a perfectly competitive market. If they enter the market, the minimum average total cost for a bundle of rubber bands, for the three of them is $2, $3, and $4, respectively. If the market price is $2.10 per bundle, then
only Alice will enter the market.
In which market structure is there a large number of firms producing slightly differentiated products?
only monopolistic competition
McDonald's is a fast-food restaurant chain. Which of the following would be a long-run decision for McDonald's?
open a new restaurant in a city
An individual's labor supply curve eventually bends backward because at a high enough wage rate,
people desire more leisure time.
A game is called a simultaneous move game if ________.
players choose their actions at the same time
In a Nash equilibrium,
players may or may not have dominant strategies.
Adverse selection is created by
private information
Which of the following describes a situation in which a good or service is produced at the lowest possible cost?
productive efficiency
A Nash equilibrium is
reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
When wages increase, the income effect of labor supply ________ the quantity of labor supplied because ________.
reduces; workers acquire more of all normal goods (including leisure) when income increases
A cooperative equilibrium is most likely to arise in a
repeated game with a small number of players.
You observe that more labor is employed and the wage rate increases. This set of events could have been the result of a
rightward shift of the labor demand curve.
Suppose in Philadelphia the quantity of economists demanded is less than the quantity supplied by 2,000 economists. As a result,
salaries for economists fall.
A player has a dominant strategy when:
she has only one best response to every possible strategy of the other player.
If an industry introduces a labor-saving technology in production, the demand curve for labor in that industry is likely to:
shift to the left.
One reason why adverse selection problems arise in health insurance markets is that
sick people are more likely to want health insurance than healthy people.
A warranty is an example of ________.
signaling
If a typical firm in a perfectly competitive industry is incurring losses, then
some firms will exit in the long run, causing market supply to decrease and market price to rise, increasing profits for the remaining firms.
Discrimination that occurs when someone assigns the properties of a group to a particular individual who is a member of that group is known as
statistical discrimination
Employers engaging in ________ try to enhance their profits.
statistical discrimination
If a firm offers higher starting salaries to Asian job candidates than to white job candidates because Asians as a group have higher SAT scores, this is an example of ________.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as ________.
statistical discrimination
When expectations cause people to discriminate against a certain group, it is referred to as:
statistical discrimination.
A ________ is a complete plan describing how a player will act.
strategy
For many jobs, as wages increase, the quantity supplied of labor increases. This set of facts is evidence that the
substitution effect is larger than the income effect and the supply of labor curve is upward sloping.
In the long run, a perfectly competitive market will
supply whatever amount consumers demand at a price determined by the minimum point on the typical firm's average total cost curve.
Economically rational means that consumers and firms
take actions that are appropriate to reach goals given available information.
Discrimination that occurs when people's preferences cause them to discriminate against a certain group is referred to as:
taste-based discrimination.
A natural barrier to entry is defined as a barrier that arises because of
technology that allows one firm to meet the entire market demand at lower average total cost than could two or more firms.
Economists generally define the short run as being
that period of time in which at least one of the firm's inputs, usually plant size, is fixed.
Which of the following is an example of a factor that a firm's owners and managers can control in making the firm successful?
the ability to produce the product at a lower cost
By continuing to operate when price is greater than average variable cost but less than average total cost, a firm limits its losses to:
the difference between its total fixed cost and the amount by which total revenue exceeds total variable costs.
A firm's primary interest when it hires an additional worker is
the extra revenue the firm realizes from hiring that worker.
All of the following are possible characteristics of a monopoly except:
the firm is a price taker
One reason why the average salary of Major League Baseball players is higher than the average salary of college professors is
the marginal revenue product of baseball players is greater than the marginal revenue product of college professors.
The marginal cost curve intersects
the minimum of the average variable cost and average total cost curves.
If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
the moral hazard problem.
When an entrepreneur invests his own financial capital in order to start a business
the opportunity cost of capital should be included in the economic cost of doing business.
An implicit cost is defined as:
the opportunity cost of using a resource that is not explicitly paid out by the firm.
If productive efficiency characterizes a market
the output is being produced at the lowest possible cost.
The labor supply for an industry would decrease if
the percentage of the population from age 16 to 65 decreases.
A key aspect of the principal-agent problem is that
the principal cannot perfectly monitor the agent's actions
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of
the principle-agent problem.
The government of Eduland provided generous unemployment benefits to all the unemployed workers. However, the new government that came into power reduced the amount of unemployment insurance paid to each worker. This increased the average number of hours spent daily by unemployed workers in looking for jobs. This suggests that ________ exists in the labor market in Eduland.
the problem of moral hazard
If the marginal productivity of labor decreases, then
the quantity of labor demanded at every possible wage rate will be less
A payoff matrix shows ________.
the return from each action that players can take in a game
In a perfectly competitive market, the average revenue curve of a firm is
the same as its demand curve.
What is behavioral economics?
the study of situations in which people act in ways that are not economically rational
Which of the following factors will not cause the labor demand curve to shift?
the wage rate
If the equilibrium wage is below the actual wage:
the wage rate will fall.
All of the following are characteristics of a perfectly competitive industry EXCEPT
there are a large number of buyers and sellers with only a few being able to influence the market price.
A teenaged babysitter is similar to a firm in a perfectly competitive industry in that, for both
there are many other suppliers of similar goods or services.
In the market for automobile insurance, moral hazard implies that
those who are insured might take greater risks
All of the following are ways by which existing firms can deter the entry of new firms into an industry except
threatening to raise prices.
The function of the agent in the principal-agent relationship is
to perform tasks for the principal.
Health insurance companies impose deductibles on policies and co-payments on claims
to reduce moral hazard problems.
The basic activity of a firm is
to use inputs to produce outputs of goods and services.
Average total cost is equal to
total cost divided by the level of output
Which of the following costs will not change as output changes?
total fixed cost
After learning about behavioral economics, it is clear that:
traditional theory does not explain all consumer decisions, but it sheds light on many of them.
Adverse selection is a situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
true
The simplest prisoners' dilemma is a game that, in part, requires
two players who are unable to communicate with each other.
Scenario: Jack and Jill are two siblings. Jack's father asked him how much he would offer to Jill if he gives him $50 as pocket money. He also told Jack that if Jill refuses the offer Jack makes, neither of them will get any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Scenario: Robert and Alice are participating in a reality show on television. Robert is offered an amount of $500 and told that he can keep the money provided he shares some of it with Alice. Robert can offer Alice as much or as little as he likes, but if Alice rejects his offer, neither of them will get to keep any money. Refer to the scenario above. This is an example of a(n) ________.
ultimatum game
Game theory is applicable to oligopoly behavior because oligopolists
use strategic behavior.
A monopolist's profit-maximizing price and output correspond to the point on a graph
where marginal revenue equals marginal cost and charging the price on the market demand curve for that output.
A monopoly is the only seller of a product
without a close substitute
Worker discrimination occurs when
workers refuse to work with persons of a different race.